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The 2 best dividend stocks I’d buy for high yields in a recession

Tom Rodgers
Dial being turned up to 'high'

The warning signs are here. Euro powerhouse Germany is heading for recession. Protest-hit Hong Kong saw its economy shrink in the second quarter. The US two and 10-year bond yield curve has inverted. Trouble is coming and it’s time to future-proof your portfolio.

Investors tend to overreact when things take a turn for the worse. Lucky for us, that means there are some great FTSE 100 dividend stocks that are cheap as chips right now.

The best thing about these well-established blue-chip stocks is that their dividends are generally reliable. It’s all very well Centrica boasting an 18% dividend yield, but when it’s only covered 0.28 times by earnings I don’t reckon that payout will actually materialise.

I also avoid highly-geared companies. Mountains of debt sloshing about in the background tend to put undue strain on dividends.

Companies in my sweet spot have a solid track record, high (but sensible) dividend yields with plenty of cover, P/E ratios under 15, and consistent EPS growth. These are the pick of the bunch.

Legal & General

Legal & General (LSE: LGEN) shares are 20% cheaper than they were three months ago, with a dividend yield now at 7.31%. LGEN has not paid lower than a 4.5% dividend in the last five years, the dividend is always covered at least 1.5 times by earnings, and hit 7.1% in 2018.

In the background, solvency is good, judging from its own releases. Adding £300m to operating profit from 2017 to 2018 reflects “increased annuity profits driven by strong performance from front and back books,” says the 2018 annual report, with ongoing good performance from the investment management side of the business and “strong fund inflows across regions, channels and product lines.” Surpluses in the group’s own funds (which means more delicious dividends for you and I) were up £1.1bn in 2018 compared to the year before.

Pre-tax profits have risen strongly alongside earnings growth, giving us a trailing P/E ratio of just 7.47 today. With an average of City analysts rating future earnings per share at 33.4p, we also have a forward P/E of 6.7.

Aviva 

With a healthy balance sheet, £2.3bn in cash, over 8% yields and a trailing P/E ratio of 9.3, £14bn market cap insurance giant Aviva (LSE: AV) seems to have it all.

A consensus of earnings estimates for the next two years suggest earning per share of 61p. With a share price now 16% cheaper than three months ago, you’ll only pay 5.9 times future earnings for this stock. Low earnings growth might be the cause of this excessively cheap figure, but the debt load could be a factor too — although new CEO Maurice Tulloch has made reducing Aviva’s 49% debt a major part of his strategy. Recent half-year results show weaknesses in Aviva’s Asian arm too, with Tulloch “reviewing strategic options” to ditch underperforming subsidiaries.

Still, over the past five years, it has paid reliable dividends and looks good value compared to the wider insurance market.

It won’t set hearts racing, but half-year results show operating profits are up 1% while interim dividends rose 3% to 9.5p per share. I don’t mind stability right now, to be perfectly honest.

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Tom holds a position in Legal and General. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019